BP Reaches $7.8B Deal With Gulf Spill Victims

By Jef Feeley, Laurel Brubaker Calkins and Edvard Pettersson -
Mar 3, 2012 8:47 AM PT

BP Plc (BP/) reached an estimated $7.8 billion settlement with businesses and individuals damaged in the 2010 Deepwater Horizon oil rig disaster that killed 11 people, removing one of three major litigation fronts facing the company over the biggest offshore spill in U.S. history.

The settlement, the amount of which both sides said may increase, will be paid out of a $20 billion trust set up to compensate spill victims, BP said yesterday in a statement. Lawyers for the plaintiffs said the accord, which must be approved by a judge, will resolve most private claims for economic loss, property damage and injuries. The trust has about $14 billion remaining in it, and victims’ lawyers noted there isn’t a cap on damages BP must pay under the deal. BP said if the trust is exhausted, it will pay additional funds directly.

The Transocean Development Driller III, left, works to drill the primary relief well during sunrise at the BP Plc Macondo well site in the Gulf of Mexico off the coast of Louisiana in July 2010. Photographer: Derick E. Hingle/Bloomberg
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“This settlement will provide a full measure of compensation to hundreds of thousands,” Stephen J. Herman and James P. Roy, the plaintiffs’ co-liaison counsel, said in a statement. “It does the greatest amount of good for the greatest number of people.”

The U.K.-based energy company still faces as much as $17.6 billion in fines for pollution law violations in a suit by the federal government, which will now take the lead in any trial over the spill. U.S. District Judge Carl Barbier in New Orleans yesterday put off the trial scheduled to start March 5 in light of the settlement.

‘Significant Progress’

“The proposed settlement represents significant progress toward resolving issues from the Deepwater Horizon accident,” BP Chief Executive Officer Bob Dudley said in the statement.

Barbier said in his order that he will schedule a status conference with lawyers to discuss issues raised by the settlement and set a new date for the trial, which is to determine which companies are liable, and for how much, in the explosion aboard Transocean Ltd.’s (RIG) rig and the resulting spill.

“Such a settlement would likely result in a realignment of the parties in this litigation and require substantial changes to the current” trial plan, Barbier said in a one-page order yesterday.

Jason Kenney, an analyst at Banco Santander SA, called the proposed accord a “a positive step forward” and “within the rational range of claim amounts assumed already in provisioning by BP.”

‘Sensible Estimates’

“While there are still settlements to be made with key plaintiffs, the reality is that sensible estimates for claims have been made,” Kenney, who has a buy rating for BP, said in an e-mail. “By implication, with the worst case scenario analysis looking increasingly unlikely, the discount in BP’s share price can also begin to unwind.”

BP rose to a 13-month high above 500 pence in London trading early this week after news that a settlement was being negotiated. The stock may gain a further 15 percent if the company keeps payments for the spill within $10 billion of the $37 billion it has already set aside in costs, broker Brewin Dolphin Ltd. said at the time.

BP would be able to absorb as much as $40 billion of costs related to the spill and still maintain a stable outlook on its A2 debt rating, which is five levels above the lowest investment grade, Moody’s Investors Service said Feb. 24.

Some analysts caution that settlements could be large enough that BP shares fall. The cost may reach as much as $25 billion in addition to payments already made, making the total cost of the spill higher than provisioned, according to Morgan Stanley & Co. analyst Martijn Rats.

Down 23 Percent

BP is still down 23 percent since the explosion. The company closed at 642.50 pence on April 19, 2010, the day before the disaster. Yesterday it rose 10 pence to 496.50 in London trading.

Under the proposed accord, if “definitive and fully documented agreements” aren’t reached within 45 days, either side has the right to terminate the settlement, according to BP’s statement. The agreement will allow victims who aren’t satisfied with the deal to “opt out,” according to the London- based company.

BP said the proposed settlement won’t increase the $37.2 billion charge it previously recorded in its financial statements for costs associated with the spill. That figure includes $20 billion BP set aside for the claims trust fund, from which the proposed settlement payout will be derived.

Paying Claims

The fund will be used to pay spill damage claims and medical injury claims as well as “state and local government claims, state and local response costs, natural resources damages and related claims,” BP said.

So far, BP said it has spent more than $22 billion on the spill, which breaks down to $8.1 billion to individuals, businesses and government entities and $14 billion on operational response.

The proposed settlement, which would cost BP an estimated $7.8 billion in addition to those amounts, includes $2.3 billion earmarked for economic losses related to the seafood industry in the Gulf of Mexico, the company said.

It doesn’t include claims against the energy company by the U.S. Justice Department for Clean Water Act violations or natural resource damages under the Oil Pollution Act.

Wyn Hornbuckle, a Justice Department spokesman, said yesterday in an e-mail the government hopes the settlement “will provide swift and sure compensation to those harmed by the Deepwater Horizon oil spill.”

Excluded Claims

The agreement also “excludes certain other claims against BP, such as securities and shareholder claims” pending in separate litigation consolidated in federal court in Houston.

The accord provides for a transition from the claims fund, the Gulf Coast Claims Facility trust, through which BP said it paid more than 220,000 claims from individuals and businesses. The company warned that, although the accord is for $7.8 billion, the $14 billion remaining in the trust may not be enough to satisfy all the costs the fund was created to address.

“It is not possible at this time to determine whether the $20 billion trust will be sufficient to satisfy all of these claims as well as those under the proposed settlement,” BP said. “Should the trust not be sufficient, payments under the proposed settlement would be made by BP directly.”

Yesterday BP appealed a ruling by Barbier denying it access to additional insurance coverage held by rig owner Transocean. BP had filed claims with Transocean’s carriers in 2010 seeking access to $750 million in coverage under multiple policies.

In his ruling in November, Barbier sided with Lloyd’s of London, along with other excess underwriters, who opposed the claims, contending the rig owner’s contract with BP didn’t provide such coverage.

Previous Settlement Talks

Before yesterday’s settlement announcement, BP had been in talks with lawyers for spill victims over a $14 billion deal to be funded by liquidating the remainder of the claims facility, three people familiar with the matter had said. Under that plan, like the agreed upon deal, BP would shift the remaining funds to plaintiffs, said the people, who declined to be identified because they weren’t authorized to speak publicly.

Settlement talks between all parties have been going on for months, two people familiar with the case have said, as the parties seek to avoid a trial over the accident.

The April 2010 Macondo well blowout destroyed the Deepwater Horizon, killed 11 workers and sent more than 4 million barrels of oil spewing into the Gulf of Mexico over three months. It spawned hundreds of suits against BP, Vernier, Switzerland- based Transocean, owner and operator of the rig, and Houston- based Halliburton Co. (HAL), provider of cementing services on site.

Shares Soared

On Feb. 26, the day before trial in the case was originally set to begin, Barbier delayed the case so settlement talks that led to yesterday’s accord could continue. BP shares soared.

BP CEO Dudley has been targeting $38 billion in asset sales to shore up BP’s balance sheet and said the company will focus on profitability rather than volume in production.

The company agreed a week ago to sell natural-gas holdings in Kansas to Linn Energy LLC for $1.2 billion.

Dudley said Feb. 7 that cash flow will increase 50 percent by 2014 from 2011 levels. Oil prices have gained about 30 percent since the start of the spill.

Shares in BP gained 5.4 percent since Jan. 3 as the company raised its dividend and reported fourth-quarter earnings that beat analyst estimates. Royal Dutch Shell Plc (RDSA), Europe’s biggest oil company, has lost 4 percent over the same period.

The BP board raised the dividend by 14 percent on Feb. 7 for the first time since the disaster. The payout to shareholders was suspended for three quarters after the spill and reinstated one year ago at half the previous level.

Clean Water Act

Even with the new agreement, BP still faces the threat of massive federal pollution claims. The U.S. Clean Water Act lets the U.S. seek fines of as much as $1,100 for each barrel of oil spilled as a result of simple negligence, often described as a failure to exercise ordinary care. The maximum increases to $4,300 a barrel for gross negligence, or a conscious act or omission, leaving BP liable for as much as $17.6 billion.

BP set aside $3.5 billion to pay Clean Water Act fines based on its own lower estimate of barrels spilled and no finding of gross negligence.

U.S. Attorney General Eric Holder, whose lawyers will now be leading the way in any trial, said Feb. 28 the U.S. has a “strong” case over liability for the explosion.

“We are prepared to go to trial,” Holder said in testimony before a U.S. House Appropriations subcommittee in Washington.

Cross-Claims

A trial would cover not only federal and state government pollution claims, but also cross-claims between BP and its partner companies in the Macondo site and rig. Barbier would decide whether BP can demand those firms pick up some of the estimated $26 billion in costs spawned by the disaster.

“Delays or deals made by other players do not change the facts of this case and we are fully prepared to argue the merits of our case based on those facts,” Lou Colasuonno, a spokesman for rig-owner Transocean, said yesterday in an e-mailed statement about the settlement.

BP agreed in October to a $4 billion accord with Anadarko Petroleum Corp. (APC), which owned a 25 percent stake in the Macondo well. It also agreed to drop claims against drilling fluid provider M-I Swaco, a unit of Houston-based Schlumberger Ltd. (SLB)

Transocean officials alleged in a Feb. 24 court filing that BP managers overseeing the well ignored questions about whether safety tests done hours before the blast were flawed.

Well Tests

Donald Vidrine, the senior BP manager on the Deepwater Horizon on April 20, 2010, talked with an engineer about unsatisfactory well tests less than an hour before the explosion, Transocean’s attorneys said.

While Mark Hafle, a Houston-based BP drilling engineer, warned Vidrine in a phone call that stability tests on the well might be flawed, “neither man stopped work” at the facility, Transocean said.

The BP officials allowed crews to continue displacing drilling fluid in the well with seawater, attorneys for the oil- drilling company said. Experts who reviewed the companies’ handling of the well noted that once the fluid was removed, the lighter seawater couldn’t stop natural gas from leaking into the well and causing an explosion.

Vidrine has refused to testify, citing medical problems and Hafle has invoked his constitutional protection against self- incrimination for refusing to testify.

Criticism of Settlement

The BP trust that will fund the proposed settlement was set up to make emergency and other types of payments to spill victims under the U.S. Oil Pollution Act, so as to speed up assistance and cut down on the number of claims filed in court.

Attorneys for some victims have argued in court filings that officials of the fund, run by Washington-based lawyer Kenneth Feinberg, used “coercive tactics” to force business and property owners to accept inadequate payments for their claims and give up their rights to sue.

While lawyers for victims whose lawsuits have been consolidated before Barbier proposed yesterday’s settlement, attorneys for other spill victims may oppose it.

Brent Coon, a Houston-based lawyer representing spill victims both in federal and state courts, said in a Feb. 27 interview that the $14 billion remaining in BP’s trust fund may not provide enough compensation for those harmed in the disaster, let alone the $7.8 billion allowed for in the settlement.

Plaintiffs’ lawyers and the companies still haven’t been able to pin down the total number of claims tied to the spill because filing deadlines don’t expire for a year, he said.

“The total claims could double from where they are now,” Coon said.

Best Interests

Another problem with the settlement proposal is lawyers for the steering committee don’t represent the majority of victims in the case, Coon said, which he added raises questions about their ability to act in the best interests of all claimants.

“A very small minority of lawyers are negotiating a deal that leaves them in control of the purse strings and let’s them dole it out,” he said. “I know a number of lawyers who are extraordinarily hostile to that idea.”

The case is In re Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico on April 20, 2010, MDL-2179, U.S. District Court, Eastern District of Louisiana (New Orleans).

To contact the reporters on this story: Jef Feeley in New Orleans federal court at jfeeley@bloomberg.net; Laurel Brubaker Calkins in Houston federal court at laurel@calkins.us.com; Edvard Pettersson in Los Angeles federal court at epettersson@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

BP Reaches $7.8B Deal With Gulf Spill Victims - Bloomberg